Following yet another rout in Asia overnight, which since shifted over to Europe, US equity futures have stabilized as a result of a modest buying/short-covering spree in the 10 Year which after threatening to blow out in the 2.90% range and above, instead fell back to 2.81%. Yet algos appear confused by the seeming USD weakness in the past few hours (EURUSD just briefly rose over 1.34) and instead of ploughing head first into stock futures have only modestly bid them up and are keeping the DJIA futs just above the sacred to the vacuum tube world 15,000 mark. A lower USDJPY (heavily correlated to the ES) did not help, after it was pushed south by more comments out of Japan that a sales tax hike is inevitable which then also means a lower budget deficit, less monetization, less Japanese QE and all the other waterfall effect the US Fed is slogging through. Keep an eye on the 10 Year and on the USD: which signal wins out will determine whether equities rise or fall, and with speculation about what tomorrow's minutes bring rife, it is anybody's bet whether we get the 10th red close out of 12 in the S&P500.

Otherwise it’s another quiet day for economic data as the market awaits

Wednesday’s FOMC minutes. In the absence of any major data releases,

today’s earnings announcements from US retailers JC Penny, Best Buy and

Home Depot will be of interest following the recent poor run of retail results

Overnight news bulletin from Bloomberg:

Treasuries gain for the first time in four sessions after 10Y yields yesterday touched 2.898%, highest since July 2011; market waiting for FOMC minutes tomorrow for possible indications of tapering timing.

Asia’s role as the world’s growth engine is waning as economies across the region weaken and investors pull out billions of dollars; India’s rupee fell to a record low today, China is in recession, and Chinese banks’ bad loans are rising

Indonesian stocks fell in the biggest four-day plunge since 2011, sending the benchmark index down 20% from its peak, amid growing concern that capital outflows will accelerate

Australia’s central bank said AUD’s direction will be important in setting policy and signaled further interest-rate cuts remain a possibility, according to minutes of its Aug. 6 meeting at which it cut rates to record-low 2.5%

Bond strategists cutting their German yield forecast are betting the euro-region’s economy is too fragile to warrant 10-year rates of more than 2%

For the first time since June, forex strategists are boosting their outlook for GBP vs EUR as conviction grows that U.K. economic growth will outstrip that of continental Europe

The spiritual leader of Egypt’s Muslim Brotherhood was arrested in Cairo as part of an army crackdown on supporters of ousted President Mohamed Mursi that has killed about 1,000 people

An extremely quiet session in G10 currency markets was observed yesterday but this was in contrast to the turmoil in EM where the sell-off was stepped up in currencies including the INR, BRL and IDR. Another tumultuous session took place overnight in Asia and has seen investors run for cover and boost safe haven flows into the JPY and CHF. The sell-off in the INR took the currency down past the 64 barrier vs the USD and though PM Singh moved to placate investors by talking up the size of the country's FX reserves, government efforts to halt the currency's freefall, slow the pace of capital outflows and stabilise the current account have so far proved fruitless. Net INR debt outflows have reached nearly $11bln since early June, with higher US yields and prospects of Fed tapering exacerbating capital flight. This has catapulted 10y benchmark yields to over 9% vs 7.6% just a month ago. Net equity outflows since early June have totalled close to $2.6bln, causing India's Sensex stock market index to extend losses to nearly 19% year-to-date. Though further INR selling cannot be ruled out, the spike in USD/INDR appears overdone compared to historical trends of capital outflows (see chart of the day).

Meanwhile the G10 currencies meandered in a 0.5% range vs the USD with eight currencies ending yesterday not more than 0.1% away vs the day's open. Barring fresh EM jitters, a lethargic session is expected again today save for the NOK where a strong Q2 GDP print will further fuel speculation of a change in rhetoric by Norges Bank at the September policy meeting (scheduled for after the election). With CPI accelerating this summer to 3% in annual terms, the central bank may conclude that a return to normal monetary policy will have to start sooner than last reported in Q2. In the June MPR, the bank estimated policy was 80bps too loose vs neutral (key policy rate vs Taylor rule). Since the stronger CPI data was released on 9 August, the June 2014 FRA has moved from 1.76% to 1.88%. However, the NOK has not been able to hold on to its gains since the strong inflation data was released as euribor futures have sold off (higher rates). EUR/NOK has rebounded off 7.80 back up to 7.91 but unless 7.9329 resistance is erased, NOK bulls will be tempted to have another crack at making a breakthrough below 7.80.

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Jim Reid recaps the full overnight action:

As markets keep a close eye on DM bond yields (UST 10yrs 4bp lower at 2.83% in Tokyo trading), its worth highlighting the impact of the rates selloff had had on emerging markets in recent days. Starting with equities, the MSCI EM index (-1.38%) had its worst performance in more than a month yesterday led by the 5.6% fall in Indonesia’s JCI index. This morning the JCI has lost another 5%, bringing its cumulative fall from its May peak to 22%. Other EM indices have been trading heavily including Mexico’s IPC (-1.3%), Turkey’s ISE100 (-2.55%) and Poland’s WSE WIG (-0.4%). As we look at our screens this morning, Asian equities continue to struggle, paced by Korea (-0.6%) and the Hang Seng (-1.3%).

In the EM currency space, the Indian Rupee’s free fall has been widely observed. Indeed, the Rupee hit another record low against the US dollar overnight (-1.0%) after briefly trading with a 64 handle. Other currencies including the South African Rand have weakened to June levels against the dollar. In EM credit markets, names such as Brazil (5yr CDS +11bp) and Mexico (5yr CDS +2bp) continue to leak wider. The Asia ex-Japan iTraxx credit index is approaching the June wides, compounded by another weak session today. As we type, the Asia Ex Japan iTraxx index is trading at 162bp, versus yesterday’s close of 146bp. Indonesian cash bonds have opened 30bp wider this morning which is dragging down other Asian EM sovereigns. The Indian 10yr bond yield is up 25bp today at 9.50%, the highest level since 2001.

Yesterday the S&P500 (-0.59%) had its 9th loss in eleven sessions and is now coming close to retracing half of its rally since markets bottomed in June. Over the same time period, 10yr UST yields have jumped by more than 25bp reinforcing our view that the tapering story overall has caused some notable damage to markets even though we’ve recovered significantly from the lows in June. Yesterday was the fourth consecutive fall for the S&P500 which is the longest losing streak since October last year, ignoring the holiday- interrupted trading period around Christmas. Banks (-1.6%) led the decliners on the index with JPMorgan underperforming (-2.7%) after reports of improper hiring practices in its Hong Kong offices (Bloomberg). The WSJ is reporting this morning that the US Department of Justice will begin investigating the firm’s energy trading business. US banks were also weighed by a new Fed paper that said that large bank holding companies “have more work to do to enhance their practices for assessing the capital they need to withstand stressful economic and financial conditions”.

One trend that has emerged this reporting season are the poor results from the US retailing sector. Luxury retailer, Saks, reported a larger-than-expected Q2 loss yesterday on disappointing sales of shoes and handbags and lower than anticipated same-store sales growth (1.5% vs analyst estimates of +4.5%). The retailer also reported lower margins on an excess of inventory. The latest result from Saks follows the disappointing earnings and outlook trends set by US retailers across all pricing points in recent weeks including Macy's, Nordstrom, Kohl's and Walmart. The S&P500 retail sector has performed relatively well this year, adding 24% against the S&P500’s 15% gain, but has started to give back some of that outperformance in August. Another round of retailer earnings reports are scheduled to be released before the US opening bell today which should give us a better picture of the state of the North American retail sector.

Amidst the negative sentiment, it’s worth noting that the S&P500 (-0.59%) actually traded up for a short, one hour period yesterday. This was helped by technology hardware stocks (+0.12%) which were one of the few sectors to close higher yesterday. This outperformance was on the back of another solid gain in tech heavyweight Apple Inc (+1.1%) which continues to benefit from expectations of new iPhone releases. The WSJ reported that Apple has asked its suppliers to ship two new iPhones in early September. At the same time, newswires are reporting that competitor Samsung will be unveiling new devices ahead of the iPhone launch including a wrist-watch like device with features of a smartphone (Bloomberg). The news is helping Samsung shares (+0.2%) this morning.

In Europe, it was a relatively quiet day with no major economic data but we noted that government bond yields were several basis points wider across the board. Part of the rise in yields was due to the Bundesbank who said its monthly report that the ECB’s forward guidance is not an “unconditional commitment”. The Bundesbank added that an ECB’s “forward guidance doesn’t rule out an increase in the benchmark rate if greater inflation pressure emerges”.

Looking at today’s calendar, it’s another quiet day for economic data as the market awaits Wednesday’s FOMC minutes. In the absence of any major data releases, today’s earnings announcements from US retailers JC Penny, Best Buy and Home Depot will be of interest following the recent poor run of retail results. Resources giant Glencore Xstrata will also be reporting results.